A technocrat government of the pro-Russia Party of Socialists (PSRM) replaced Moldova’s liberal-led reformist government, which collapsed over justice reforms in November.

This will restrict structural reforms and could prompt the European Union (EU) to reduce or suspend its financial aid to the Moldova, potentially delaying energy sector and public finance reforms, though existing projects including the Ungheni-Chisinau gas pipeline will likely continue.

PSRM will prove the dominant political force in Moldova in 2020 and beyond, with comments from President Igor Dodon (former PSRM leader) on possible nationalisation of a contract for Chișinău International Airport likely to further weigh down on investor sentiment.

Developments around public investigations initiated by the previous government will indicate the risk of political interference in public tenders and concession contracts in the coming years.

Moldova’s reformist direction is uncertain following the collapse of the ACUM-PSRM government on November 12. This was triggered by the withdrawal of the pro-Russia socialist PSRM party from the reformist coalition of former Prime Minister Maia Sandu from the liberal ACUM bloc over public prosecution reforms. PSRM formed a minority cabinet two days later, supported by the centre-left Democratic Party of Moldova (PDM). While nominally branded as a technocrat government, new Prime Minister Ion Chicu served as finance minister in the 2016-2019 PDM-backed government and as adviser to President Igor Dodon (who led the PSRM in 2011-2016).

'Old Guard' Remains Dominant In Moldovan Politics

Moldova - Seats In Parliament

Source: National Sources, Fitch Solutions

PSRM Will Prove The Main Political Force In 2020

The technocrat status of the government combined with the PSRM's control of both the presidency and the premiership gives the cabinet the political cover and legal power to call snap elections at their own schedule, which could benefit the party’s performance in future elections. As a result, while we do not expect the administration to serve out its full term to 2023, it will likely prove more durable than most previous technocrat cabinets and currently appears on course to remain in power throughout 2020.

PSRM could grow in prominence and capitalise on disillusioned PDM voters after business tycoon and former PDM leader (2016-2019) Vladimir Plahotniuc left Moldova for self-imposed exile in the US on the same day that his PDM coalition collapsed following a constitutional crisis on June 14. Reportedly involved in a USD1bn bank fraud case in 2014 (12% of Moldova’s GDP) and for manipulating court rulings, Plahotniuc is currently sought by Moldovan, Romanian, Russian, UK, and US authorities on various criminal charges. Reflecting elevated PSRM popularity on the back of these issues, on November 11, PSRM won the municipal elections in the capital of Chișinău, the first time a socialist candidate ever prevailed in the traditionally liberal-voting city. Growing PSRM influence over Moldovan media as well as a degree of progress in talks with Russia on resolving the Transnistria Dispute also appear to be facilitating this trend.

Heightened Risks Of Political Interference In Tenders And Concession Contracts

PSRM’s dominance risks creating an environment conducive to vested interests. Moldova has a history of allegations of political interference in the justice system, including highest-level institutions such as the Constitutional Court. The country has also seen limited progress in terms of fighting corruption and strengthening checks and balances, as suggested by Transparency International’s Corruption Perceptions Index, which placed Moldova below most countries in the region in 2018 (see chart below). This in turn heightens the risk of political pressure over public tenders and against existing concessionaires. For example, since the collapse of the ACUM-led government, President Dodon has increased threats to annul a concession held by NR Investment (a Channel Islands-based property fund) to operate Chisinau International Airport.

Structural reforms will likely be limited as a result of the new government no longer being shaped by the pro-EU ACUM bloc, allowing entrenched problems to persist. PSRM’s influence over policy will allow the party to water down far-reaching reforms aimed at improving transparency in the public sector and tackling corruption. For example, PSRM plans to implement legislation which has been criticised by the EU as increasing the risk of greater political interference in the nomination of Moldova’s prosecutor general.

Although we expect that EU pressure and public support for anti-corruption legislation will allow for some reforms, these will be largely piecemeal and cosmetic. A major and public setback to these reforms would likely prompt the EU to limit its financial aid programmes in the country, which have only resumed in July 2019 (a month after the now-collapsed reformist government took office) following their suspension over the controversial annulment of elections in 2018.

So far, the EU has granted EUR44.54mn in budget support for reforms in public finance, energy sector, anti-money laundering, and policing as part of the EU-Moldova Association Agreement, the suspension of which would have a negative impact on investor sentiment. However, existing projects such as the Ungheni-Chisinau gas pipeline would likely proceed at a gradual pace regardless due to the relatively modest volume of this funding and a degree of insulation from EU conditions.

Developments in public prosecution will help indicate the trajectory of justice reforms and related political interference risks. Disagreements between ACUM and PSRM over the issue brought down the reformist government in November, and the Moldovan Parliament subsequently appointed Alexandru Stoianoglo as prosecutor general on November 29. Stoianoglo appears to be a compromise candidate: he is a former member of the PDM but left the party in 2014 and does not appear to maintain connections to the party according to Moldovan civil society groups. Although his post has significant investigative powers, he partly depends on information from Moldova’s intelligence services, which report to the president. Stoianoglo will now take on proceedings initiated by the now-collapsed reformist government: his willingness (or lack thereof) to investigate individuals linked to the PSRM will help indicate the trajectory and scale of justice sector reforms and the related risk of political interference in the economy.